HIRE PURCHASE FINANCE

AND CONSUMER CREDIT

CHAPTER 5
M Y KHAN - Financial Services
Hire Purchase Finance -
Meaning
Payment of Periodic instalments
Immediate possession of goods by the buyer
Ownership of goods with vendor until full
and final payment
Vendors right to repossess the goods in
case of default by buyer
Treatment of instalment as a hire charge till
the payment of last instalment.

Hire purchase - definition
An agreement under which goods are
let on hire and under which the hirer
has an option to purchase them in
accordance with the terms of the
agreement.
Rights of the Hirer
Right of Protection
Right of Notice
Right of Repossession
Right of Statement
Right to Excess
Amount


Rate of Interest
Types of Interest rates popularly used in
Hire Purchase Transactions
Add on Rate of Interest
Flat Rate of Interest
Effective Rate of Interest
Lease financing Vs Hire
purchase Financing
Lease Financing
Ownership lies with
vendor(lessor)


Lessor(vendor) is
entitled to claim
depreciation tax shield
HP Financing
Ownership transferred
to the hirer on the
payment of last
instalment.
The hirer is entitled to
claim depreciation tax
shield

Lease financing Vs Hire
purchase Financing.
Capitalization of the
asset is done in the books
of the leasing co.
the entire lease payment is
eligible for tax
computation in the books
of the lessee.
Leasing used as a source
of financing for high cost
assets like ships,
machinery, airplanes etc



Capitalization of the
asset is done in the books
of the hirer.
Only the hire -interest is
eligible for the tax
computation in books of
hirer..
HP use as a source of
finance for low cost assets
as automobiles, office
equipments etc.

Lease financing Vs Hire
purchase Financing.
No Down payment
required for using leased
assets.

In Lessees books, leased
assets shown as a note
only.
Not suitable for low
capital enterprises , who
desire to show strong asset
position




Down payment is required
to be made for acquiring
the asset, and margin of
20-25% maintained.
In hirers books ,HP assets
shown as an asset, and
instalments payable as a
liability.
HP suitable for low
capital enterprises , which
need to show strong asset
position.
Lease financing Vs Hire
purchase Financing.
An asset given on
lease, is fixed asset for
lessor.

All receipts from
lease, is shown in
P&L, the Lessors
books.

The hire vendor will
show the HP asset, as
stock in trade, or as
receivables.
Only the interest
portion, from
instalments is taken to
the hire vendors
Profit & loss Account.
Process of Hire Purchase
The Dealer, contracts with finance co. for financing his hire
purchase deals.
The customer selects the goods for HP, and dealer arranges for
the complete set of documents.
Down payment by customer on completion of proposal form.
Dealer sends documents to finance co. with request to purchase
the goods, and accept the HP transaction.
The finance co. signs the agreement and sends copy along with
EMI details to dealer.
Dealer delivers the goods to the customer, property passes on to
the finance co..
Hirer pays EMIs, and on last payment , the ownership passes on
to him, with loan completion certificate by the finance co.
HIRE PURHASE Legal Framework
HP act 1972.
Two aspects of HPA Bailment of goods ,
element of sale.
Essential Ingredients of Sale : Two parties, Goods,
Money Consideration, Transfer of Ownership,
Essentials of a valid contract.
Sale Vs Bailment : Sales conveyance of property
from seller to buyer for a price. Bailment : mere
transfer of possession of goods to bailee, with no
conveyance intended.
HIRE PURHASE Legal Framework
Sale vs Hire Purchase : Differences :
In HP the possession of the goods with hirer, while
ownership with original owner.
No agreement to buy, but only option to buy under certain
conditions.
Ownership to hirer, only when he exercises his option by
making full payment.
Destruction of goods before making the contract :
destruction/damage, without the knowledge of the seller,
such that goods do not match the description in Contract,
then contract null and void.
HIRE PURHASE Legal Framework
Destruction of goods, after Agreement to Sell but before Sale : damage
without fault of buyer/seller, agreement is void, provided ownership is
not passed on.
Document of Title to Goods : document which enables to deal with
goods as owner. Eg. Cash Memo, bill of lading , dock warrant, lorry
receipt, Railway receipt, Delivery order.
Earnest Money/Security Deposit : payment by buyer in advance, for
due performance of contract. In case of default, liable to be forfeited,
and contract goes off.
Conditions and Warranties : relating to nature and quality of goods and
their fitness for the buyers purpose. Condition stipulation which
forms the basis of the contract. Warranty stipulation which is
subsidiary to the main purpose of the contract. Legal implications
different for both.

HIRE PURHASE Legal Framework...
Implied Conditions :
- Condition as to Title in case of
Sale/Agreement to sell.
- Condition as to Description
- Condition as to Merchantability
- Condition as to Wholesomeness .
Implied Warranties : any of the above plus
Quite Possession , Freedom from
Encumbrances.
HIRE PURHASE Legal Framework...
Doctrine of Caveat Emptor (let the buyer beware):
applicable to all sale contracts when buyer relies on his
own skill & judgement for suitability of the goods for his
purpose.
Then seller cannot be held responsible if there are defects
in the goods., except where
buyers purpose informed to the seller
goods sold by description by a manufacturer/seller.
Seller fraudulently misrepresents the latent defects.
HIRE PURHASE Legal Framework...
Transfer of Property in Goods :
Two essential requirements :
- Goods must be ascertained & The parties must intend to
pass the property in the goods.
Rules for Transfer of Property
Specific goods in Deliverable State : Property in the goods
passes to the buyer when the contract is made, irrespective
of whether , the time of payment of the price or time of
delivery of the goods is postponed.
Specific goods to be Put in Deliverable State : property in
goods does not pass till the seller converts the goods to a
deliverable state.
HIRE PURHASE Legal Framework...
Specific goods to be Weighed or Measured :
if seller required to weigh , measure, test the goods for
ascertaining the price, then Property does not pass till the
same is done, and buyer has notice thereof.
Goods sent on approval (sale or return basis): property in
goods passes on to the buyer, after he has signified his
approval, or if he does not signify the approval, but does not
reject it either till the valid date, then property passes to the
buyer.
Reservation of Rights of Disposal :
if seller reserves the rights of disposal of goods until certain
conditions are fulfilled, then property does not pass on to the
buyer till those conditions are complied with.

HIRE PURHASE Legal Framework...
Delivery of Goods : it may be actual, symbolic or
constructive.
Rules of Delivery :
Part Delivery : a delivery of part of the goods, in progress of the whole
delivery, is delivery of the whole. But intentional part delivery is not
whole delivery.
Buyer to Apply for Delivery : seller not bound to deliver, unless buyer
applies for delivery.
Sellers Duty to Deliver: he is duty bound to deliver goods on application
by buyer , in accordance with the terms of the contract.
Place & Time of Delivery : place & time of delivery as per contract.
Otherwise delivery at the place of the goods, at the time of agreement.
Other rules regarding Cost, quantity, delivery in instalments.
HIRE PURHASE Legal Framework...
Rights of the Unpaid Seller :
Against Goods and Against the Buyer.

Right to Lien : an unpaid seller with possession of goods will retain
them where The goods are no sold under credit, sold on credit but
credit has expired or the buyer becomes insolvent.

Right to Stoppage in Transit : if the buyer is insolvent, then unpaid
seller has the right to repossess in transit.

Right of Resale: allowed under limited situations, where the goods are
of perishable nature resale possible without notice to buyer/ or after
notice of resale buyer does not pay up/ or when the seller has under the
contract right for resale without any prior notice.
HIRE PURHASE Legal Framework
Buyers Remedies Against the Seller :
Suit for Damages for Non Delivery : where there is
wrongful neglection or seller refuses to deliver the goods.
Suit for price non delivery after payment.
Suit for Specific performance where the contract is for
specific goods, suit for delivery of the same goods.
Suit for Repudiation of Contract before due date
where the seller repudiates the contract before the date of
delivery, buyer would sue the seller for anticipatory
breach.

Financial Evaluation
For the Hirer
Cost of Hire Purchase Vs Cost of Leasing
Cost of Hire Purchase is
- Down payment + service charges + PV of hire
purchase payments (Kd) PV of depreciation tax
shield (Kc) PV of net salvage value (Kc).
Cost of Leasing is
- Lease management fee + PV of lease payments
(Kd) PV of tax shield on lease payments (Kc) +
PV of interest tax shield on hire purchase (Kc)
Financial Evaluation
From the viewpoint of the Vendor :
NPV of Hire Purchase Plan:
- PV of the Hire purchase instalments
+Documentation and service fee
+PV of tax shield on initial direct cost.
_ Loan amount
_ PV of Interest tax of financial income
_ PV of Income tax of financial income
_PV of income tax on documentation
Consumer Credit
Includes all asset based financing plans
offered to individuals. (eg. Cars,
scooters,VCRs, TVs, Refrigerators, washing
machines etc., personal computers.).
Main supplier of consumer credit are
Multinational Banks, commercial banks,
Finance cos..etc
Consumer Credit...
Salient Features :
Parties to the transaction : Bipartite arrangement - two
parties viz borrower/consumer and dealer/financier.
Tripartite Transaction - dealer, financier, and customer.
The dealer arranges the credit from the financier.
Structure of the transaction :
Hire-Purchase , Conditional Sale , Credit Sale .
Hire Purchase - Most tripartite consumer credit
transactions are of this type. Customer option to purchase
the asset on completion of the pay back period.
Consumer Credit ...
Conditional Sale : Ownership not transferred until full
payment of purchase price, including the credit charge.
The customer cannot terminate the agreement.
Credit Sale : Ownership transferred to the customer on first
instalment payment. But the agreement cannot be
cancelled.
Payment Period and ROI :
Payment period - 12 -60 months.
ROI - generally flat rate. Effective Rates generally not
disclosed. Sometimes in place of ROI, the EMI for
different payment periods is mentioned.
Consumer Credit ...
Security :
First charge on assets. The consumer cannot
sell the hypothecated asset.
Evaluation
Can be made with Effective Rate of Interest
and rebates for early repayments.